In a year where COVID-19 has restricted travel, many employers may find themselves with employees that have a substantial amount of accrued but untaken annual leave. The many important reasons why employees should take their annual leave include taking a break for wellbeing purposes, risk management in having to hand over the employee's matters for a period while the employee goes on leave, and simple good time management and planning since employers will not want the bulk of their employees taking large amount of leave at the same time when travel opens up and/or when times are busy. 

So, what can employers do to get their employees to take annual leave?

  1. Can Employers Forfeit Unused Annual Leave?

    If employees know that their annual leave may be forfeited, that may encourage them to take their annual leave. To work out whether annual leave may be forfeited, an employer must work out whether they are forfeiting statutory annual leave, that is, the annual leave prescribed by the Employment Ordinance (EO) or contractual annual leave, which is any leave provided in addition to statutory annual leave. 

    Statutory annual leave is regulated by the EO and cannot be forfeited. However, in certain circumstances, employers may be able to make a payment in lieu (see Q3 below). 

    Contractual annual leave is regulated by the contract of employment. Sometimes the contract of employment, as well as in practice the employer, do not clearly distinguish between statutory and contractual annual leave, which potentially means that the more generous contractual annual leave may need to be treated in accordance with the EO. 

    An employer is free to agree with its employees on the treatment of contractual annual leave, including to forfeit it without additional compensation if it is not taken by the end of the leave year. 

  2. Can Employers Direct Employees to Take Annual Leave?

    Employers are under an obligation to grant statutory annual leave in the year following accrual of the annual leave, breach of which is an offence. As such, the obligation is on the employer to ensure that the employee takes the statutory annual leave within the prescribed time. 

    Under the EO, an employer may determine when statutory annual leave is to be taken after consulting with the employee. The employer must give not less than 14 days' notice in writing to the employee of the time that it has selected (unless a shorter period has been agreed with the employee). Although the employee must be consulted, there is no requirement on the employer to obtain the employee's consent or agreement to the date(s) determined by the employer.

    The employer will also need to comply with the contract of employment, even if it imposes more onerous obligations on the employer.

    So, in short, subject to any more onerous contractual obligations with which an employer must comply, an employer can require an employee to take statutory annual leave on the dates it has selected after consulting with the employee and giving them 14 days' written notice of those dates. 

  3. Can an Employer Buy Out Accrued Untaken Annual Leave?

    Making a payment in lieu of accrued but untaken statutory annual leave may be an option for reducing an employee's leave balance. However, this (a) is an expensive option, (b) is only permissible in limited circumstances and (c) does not fulfil some of the objectives of granting annual leave such as for wellbeing reasons and risk management. 

    The limited circumstances where it is permissible to make a payment in lieu of statutory annual leave are:

    • If an employee has an annual leave balance of over 10 days during a leave year, the employer may (with the agreement of the employee) buy out those days in excess of 10 by paying a sum equivalent to the annual leave pay;
    • Where the employer has failed to grant statutory annual leave accrued in respect of a leave year in the year following its accrual, (in addition to the offence committed) the employee has the option of either taking the leave or receiving a payment in lieu of that annual leave; and
    • On termination of employment.  

Conclusion

Taking annual leave benefits both the employee and employer. An employer should consult with its employees to work out a leave schedule. For those where agreement on the time for taking annual leave cannot be reached, there is a process available to the employer to grant statutory annual leave to an employee, and depending on the contractual arrangements, require an employee to take contractual annual leave as well. 

Employers should also review their contracts of employment and annual leave policy to ensure that these documents provide them with the flexibility to deal with, among other things, the taking of annual leave.

Originally published by Mayer Brown, October 2020

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